Final Regulations on Internal Revenue Code Section 409A

January 2009KeystonerSeth I. Corbin

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Reprinted from the Pennsylvania Optometric Association’s Keystoner January 2009.

The IRS issued final regulations regarding Internal Revenue Code Section 409A back in April 2007. Section 409A directs when payments of deferred compensation can occur and restricts the degree to which the timing of such payment can change.

Under the regulations, an agreement is deemed to provide for the deferral of compensation if an employee acquires a legally binding right to compensation for services performed during one taxable year which is payable to the employee in a later year. Severance compensation and/or salary continuation provisions in the many physician employment contracts meet this definition and, therefore, bring the employment contracts under the reach of Section 409A.

There have been several starts and stops as to the effective date of this legislation. The deadline for bringing documents into compliance with Section 409A now is December 31, 2008. Failure to comply with Section 409A by this date will cause the full amount of the deferred compensation to be included currently in the employee’s gross income. In addition, it may subject the employee to a 20% penalty tax.

A lot of the “issues” that arise under Section 409A can be revised within employment/shareholder agreements without disrupting the original intent of the practice and its shareholders.